I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Thursday, October 9, 2008

Brave New World

The US government announced that it may take ownership stakes in banks in order to promote lending. What exactly are they going to do, call out the Guard to round up the good citizens, frog march them to the bank and force them to take out overdrafts at the point of a gun? How incredibly, unfathomably short-sighted... Can't these people see past their noses? (No, in fact they cannot).

Rule one of finance (amongst many such number ones): never let them see you sweat. And the entire US banking/finance/government establishment is sweating so much that it is drowning the whole world in their worry.

Take Mr. Bernanke, for example: he's expanding the Fed's actions on a daily basis - to no avail. He has entirely misdiagnosed what is happening as a severe, but transient crisis of confidence that can be overcome by piling on more and more government debt. In fact, however, we are at the starting point of a deeper, wider and radical transformation of the global economy, one that will ultimately lead us away from the faux riches of Permagrowth and towards a more sustainable future.

Finance as practised in the last 30 or so years has no place in this brave new world. There is no room - or any need whatsoever - for chop-and-shop LBO strippers, asset pumpers, market operators, derivatives designers, financial engineers... No, this gallery of rogues has seen the end of their days. Instead, relationship finance will fast make a comeback, if only because the manufacture and placement of unprovenanced securities to faceless "investors" is no longer possible. From now on real investors - the only ones still left standing - will ask for every detail and reason behind their potential investments.

And the market knows... The collective wisdom of millions acting in their self-interest has ground market prices of old-style financial companies into dust. That's no coincidence and no "crisis", either. It's the most obvious sign that the Pony Express is no more... And like all major turning points there will be plenty of opportunity for those with foresight, once the dust settles.

I remember all the pundits saying sometime ago that the US wouldn’t go through a protracted downturn like Japan because “American capitalism” would take the quick and necessary steps to deleverage. So much for that.

Finance as practised in the last 30 or so years has no place in this brave new world. There is no room - or any need whatsoever - for chop-and-shop LBO strippers, asset pumpers, market operators, derivatives designers, financial engineers... No, this gallery of rogues has seen the end of their days. Instead, relationship finance will fast make a comeback, if only because the manufacture and placement of unprovenanced securities to faceless "investors" is no longer possible. From now on real investors - the only ones still left standing - will ask for every detail and reason behind their potential investments.

I think that what Hell sees (and me too), and perhaps what Joe M. and the like-minded do not see, is that we are being force to - and should - strip away all the fluffy excesses of our economy sustained by financial wizardry and Wall Street mirrors...and start an environmentally & financially sustainable recovery with the hard physical assets that underpinned all that financial fluff and will remain with us. We then re-prioritize and re-allocate what also remains -the talents & skill sets of our workforce.FIRE wizardry will not be a priority in this recovery as emphasized in today's blog.

The above can be done without folks falling back on the 'guns, gold, bullets, & pitchforks' routine. The above will take a chunk of time and be emotionally grueling for those least adaptive/flexible in their thinking and also those who still feel a sense of entitlement based on now-vanished FIRE economic hierarchies.

I doubt we’ll get federal leadership on this anytime soon...the drumbeat of change must come from the bottom and gain traction via local politics, local businesses and our community leaders (us). We must direct our federal leaders on this.

The Financial Times had a different take on what caused today's late-day plunge:

Paulson "ruled out a 'grand plan' for an international bail-out of the financial system," [and] warned that the [$700B EESA] scheme and the half percentage point interest rate cuts in countries including the UK and the US would not be enough to prevent more financial institutions from imploding. "One thing we must recognise: even with the new Treasury authorities, some financial institutions will fail," he said. "The EESA doesn't exist to save every financial institution for its own sake." Neither should investors expect a quick recovery in the markets, he added."

The FT's by-line: "More banks will fail in the weeks ahead despite dramatic moves by policymakers across the world to tackle the financial crisis, the US Treasury Secretary admitted last night."-end

Paulson is speaking for Bush & Bernanke; this could set the stage for capitulation on the Street and, more importantly, for fessing up to America that 'Roubini-think' is right: let’s dismiss our false hopes & get to work on bunkering down and planning a recovery down the road. I still dont see why Paulson's comments weren’t carried domestically on Bloomberg, WSJ or NYT, or by the CNBC jabbering heads.-Avl

There is absolutely no chance that the present upheaval, upheaval such that millions of people are, as I write, becoming pauperized, will be followed by anything other than mayhem. And while I'm very aware of the power of self fulfilling prophecies, it is simply impossible for me to imagine how the next few years, at a minimum, will not represent the sort of times that are read about in centuries to come with absolute awe.

If that sounds like hyperbole, so be it. I wish you all the best of luck. We are all going to need it.

Now I think I see why they wanted to privatize Social Security!Looks like endgame to me...I find it funny how noone has mentioned cutting the defense budget.At a time when we need someone with stature to give us a fireside chat,give us some shred of hope...The absolute worst thing to happen to a nation is to wipe out the middle class.Big mistake...

Anon above,You can't cut the defense budget if your goal is world domination and subjugation of the masses, both foreign and domestic. Until Americans renounce and denounce global imperialism they will be condemned to increasing impoverishment. Guns vs Butter, take your choice.

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.